Botox and Big Money

needleBotox has been big news this year – not because of its age defying effects but because of hedge funds. Activist hedge fund firm, Pershing Square Capital Management, run by Bill Ackman, amassed nearly 10% of Botox-maker Allergan Inc. and launched a hostile takeover bid to buy the company in partnership with Quebec-based Valeant Pharmaceuticals International Inc. Over the summer, other hedge funds piled into Allergan stock and by the end of August, the company had become a top hedge fund holding – right up there with stock behemoth, Apple Inc.

As activist hedge fund managers become a more prominent part of the landscape, their ultimate effect on the health of companies and capital markets has been the sudject of much debate. Which is why this new piece of research is particularly interesting. John C. Coffee and Darius Palia, the authors of “The Impact of Hedge Fund Activism: Evidence and Implications,” raise — and attempt to answer — these four important questions through empirical research and analysis:

  • Who are the targets of activism?
  • Does hedge fund activism create real value?
  • What are the sources of gains from activism?
  • Do the targets of activism experience post-intervention changes in real variables?

In all, their conclusions do not wholeheartedly support claims that activist investors are a positive development in financial markets. In fact, aside from their short-term price impact, the evidence is decidedly mixed. In particular, the authors find that conclusions about improvements in target operating performance that some have expressed are actually overextended beyond their actual data – and premature.

It’s worth a read for anyone following for investors in big name stocks that have attracted the attention of activist hedge funds. You can download the paper here.